International Business Machines Corporation (NYSE:IBM): Time For A Financial Health Check

International Business Machines Corporation (NYSE:IBM), a large-cap worth US$145.84B, comes to mind for investors seeking a strong and reliable stock investment. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. But, the key to their continued success lies in its financial health. Let’s take a look at International Business Machines’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into IBM here. View our latest analysis for International Business Machines

Does IBM produce enough cash relative to debt?

Over the past year, IBM has ramped up its debt from US$42.18B to US$46.86B – this includes both the current and long-term debt. With this growth in debt, IBM’s cash and short-term investments stands at US$12.58B for investing into the business. Additionally, IBM has generated US$16.72B in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 35.69%, meaning that IBM’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In IBM’s case, it is able to generate 0.36x cash from its debt capital.

Can IBM pay its short-term liabilities?

At the current liabilities level of US$37.36B liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.33x. Generally, for IT companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.

NYSE:IBM Historical Debt Mar 8th 18
NYSE:IBM Historical Debt Mar 8th 18

Can IBM service its debt comfortably?

Since equity is smaller than total debt levels, International Business Machines is considered to have high leverage. This is common amongst large-cap companies because debt can often be a less expensive alternative to equity due to tax deductibility of interest payments. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. The sustainability of IBM’s debt levels can be assessed by comparing the company’s interest payments to earnings. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. For IBM, the ratio of 25.65x suggests that interest is amply covered. High interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as IBM is a safe investment.

Next Steps:

IBM’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around IBM’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure IBM has company-specific issues impacting its capital structure decisions. You should continue to research International Business Machines to get a more holistic view of the large-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for IBM’s future growth? Take a look at our free research report of analyst consensus for IBM’s outlook.
  2. Valuation: What is IBM worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether IBM is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.